Empirical Evidenceon the Effects of Tax Incentives

IMF Working Papers, July 1, 2009

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Empirical Evidenceon the Effects of Tax Incentives

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Bibliographic details

• Authors: Alexander D Klemm, Stefan van Parys
• Published: July 1, 2009
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451872835.001

Research questions and data

• Research questions:
  • Are incentives used as tools of tax competition?
  • How effective are incentives in attracting investment?
• Dataset:
  • New dataset of tax incentives in over 40 Latin American, Caribbean and African countries for the period 1985–2004.
• Methods:
  • Spatial econometrics techniques for panel data (used to analyze tax competition).
  • Dynamic panel data econometrics (used to analyze effectiveness in attracting investment).

Main empirical findings — tax competition

• Evidence for strategic interaction in tax holidays.
• Evidence for competition over the corporate income tax rate.
• No evidence for competition over investment allowances and tax credits.

Main empirical findings — effectiveness for investment and growth

• Evidence that lower corporate income tax rates are effective in attracting FDI.
• Evidence that longer tax holidays are effective in attracting FDI.
• No evidence that lower corporate income tax rates or longer tax holidays boost gross private fixed capital formation.
• No evidence that lower corporate income tax rates or longer tax holidays boost growth.

Implications for policymakers (as supported by the paper's findings)

• Policies focused on lowering the corporate income tax rate or extending tax holidays can be expected to attract FDI.
• Such tax incentive policies should not be relied on, based on this evidence, to increase gross private fixed capital formation or to raise overall growth.
• Policymakers should consider that tax holidays exhibit strategic interaction across countries (tax competition), whereas investment allowances and tax credits do not show similar competitive patterns in this study.

Empirical Evidenceon the Effects of Tax Incentives — Alexander D Klemm; Stefan van Parys; July 1, 2009.

Content in this bundle

• 1. Tax Variables
  • 1. Tax Variables (Markdown version)
  • 1. Tax Variables (PDF)